Kemper Corporation (NYSE: KMPR) — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
Kemper is a U.S. insurance holding company operating in Preferred Property & Casualty, Specialty Property & Casualty, and Life & Health. On July 2, 2018, it acquired Infinity Property and Casualty for approximately $1.5 billion in cash, stock, and equity-based consideration. Infinity’s results are included from the acquisition date, limiting direct comparability with 2017.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Earned premiums | $3,384.4 | $2,350.0 |
| Total revenues | $3,725.1 | $2,723.4 |
| Income from continuing operations | $188.4 | $119.9 |
| Net income | $190.1 | $120.9 |
| Diluted net income per unrestricted share | $3.22 | $2.33 |
| Net cash provided by operating activities | $539.2 | $240.6 |
| Total assets at year-end | $11,544.9 | $8,376.2 |
| Long-term debt, carrying value | $909.0 | $592.3 |
| Shareholders’ equity at year-end | $3,050.1 | $2,115.6 |
- Underwriting: Preferred P&C reported a 104.6% combined ratio, improved from 118.7%; Specialty P&C reported 96.0%, unchanged. Specialty’s underlying combined ratio was 95.7%, versus 95.1%.
- Segment results: Net operating income was $25.7 for Preferred P&C (2017 loss of $45.4), $115.8 for Specialty P&C ($56.3), and $91.5 for Life & Health ($91.9).
- Investments: Net investment income was $340.9, up from $327.2. The company recorded a $64.3 pretax loss from changes in fair value of equity and convertible securities; 2018 accounting adoption moved equity fair-value changes into earnings.
- Cash and liquidity: Year-end cash was $75.1. The parent directly held cash and investments of $100.6, compared with $197.3 a year earlier. Direct insurance subsidiaries paid $130.4 in dividends to the parent during 2018; Kemper estimated up to $351 million could be paid in 2019 without prior regulatory approval.
- Shareholder returns: Kemper paid $0.96 per share in dividends for the year and made no share repurchases. The remaining repurchase authorization was $243.7.
Material changes versus the prior comparable period
- Earned premiums increased $1,034.4, primarily from Infinity and growth in Kemper’s existing specialty auto business. Specialty P&C earned premiums rose to $2,027.4 from $1,005.7; the acquisition contributed $758.1 of the increase.
- Net income rose $69.2. Management attributed improvement mainly to lower catastrophe losses and favorable reserve development in Preferred P&C, and improved underlying losses and higher investment income in Specialty P&C.
- Catastrophe losses and LAE, net of reinsurance and excluding prior-year reserve development, were $96.0 versus $184.9. Net prior-year reserve development was favorable by $5.2 in continuing operations, compared with adverse development of $20.4 in 2017.
- Adjusted consolidated net operating income, a non-GAAP measure, was $258.4 versus $92.5. This measure excludes specified investment gains/losses and acquisition costs; 2018 results also included favorable tax-law adjustments and a partial CSC judgment recovery.
- Insurance expenses rose to $900.5 from $644.3, primarily due to Infinity and amortization of acquired purchase-accounting adjustments. Interest expense also increased, partly reflecting acquisition financing.
- Other comprehensive income was a loss of $190.8, versus income of $57.4, largely reflecting investment valuation movements. Total comprehensive income was a loss of $0.7.
- Fourth-quarter net income was $6.5, compared with $36.9 in fourth-quarter 2017. Fourth-quarter continuing income was $5.0; the quarter included a $76.4 loss from changes in fair value of equity and convertible securities.
Outlook, commentary, risks, contingencies, and unusual items
- The filing does not provide specific earnings or premium guidance. Management describes the expected benefits of Infinity integration and cost efficiencies but cautions that synergies may be delayed, reduced, or not realized; integration and transaction costs may continue.
- Infinity purchase accounting remained preliminary at year-end. The company reported $789.4 of goodwill assigned to Specialty P&C and $143.3 of amortization of value-of-business-acquired and other intangible assets during 2018.
- Catastrophe exposure is a central risk, including wildfire, hurricane, hail, and other severe events. The company reported $31.8 of P&C catastrophe reinsurance recoveries in 2018; actual losses, reinsurance availability, pricing, and reinsurer performance may differ from estimates.
- Property and casualty reserves are estimates subject to material uncertainty. Gross P&C reserves were $1,874.9 at year-end, up from $1,016.8, substantially reflecting Infinity. Management estimated that specialty personal auto reserves could vary by $59.1 in either direction under its stated one-standard-deviation scenario.
- Kemper recognized $35.7 in partial payment of a judgment against CSC/DXC, including $28.2 reported as a gain in other income after tax. The remaining judgment balance is not recognized because collection and timing are uncertain; the defendant appealed.
- Investment markets affected reported results: equity and convertible fair-value losses were recorded in earnings under newly adopted accounting guidance, while fixed-maturity unrealized losses were reflected primarily in other comprehensive income. The filing cautions that investment values and income are exposed to market, credit, interest-rate, and liquidity risks.
- Other significant risks include insurance regulation and rate approvals, claims inflation and reserving, litigation and unclaimed life-insurance proceeds, competition, cyber and technology risks, and restrictions on dividends from regulated subsidiaries. The auditor issued unqualified opinions on the financial statements and internal controls; management reported effective controls.
Important facts for investors to verify
- Track Infinity integration, purchase-accounting amortization, retention of key personnel, and whether anticipated cost savings emerge.
- Review Specialty P&C growth and loss experience, including the performance and development of acquired Infinity accident years; distinguish acquisition-driven premium growth from organic growth.
- Monitor reserve development, especially specialty personal auto, and compare subsequent claims emergence with the disclosed reserve sensitivity.
- Follow catastrophe losses, reinsurance recoveries, program costs, and the collectability of reinsurance recoverables.
- Assess recurring earnings separately from the CSC judgment recovery, tax-law benefit, acquisition costs, and investment fair-value movements.
- Review debt obligations and parent liquidity alongside regulatory limits on subsidiary dividends; verify the timing and collectability of the remaining CSC judgment.